Best Practices for Investment Committees

By Rocco DiBruno and Donald B. Trone

An indispensable guide to avoiding the legal and financial pitfalls and of retirement plan investment

While it has always been true that a well-staffed and managed investment committee is key to the success of a corporate retirement plan, in today's increasingly complex and litigious world it is also a matter of survival. But what constitutes a prudent investment committee selection and operating process? How should a committee be selected and governed? How much reliance should a committee place on outside consultants? Written by an author with extensive, in-the-trenches experience, this book provides complete answers to these and all vital questions concerning the creation, staffing and management of a highly-adept investment committee, along with expert advice and guidance on serving on an investment committee and ensuring that your 401(K) investment program is sound, efficient and in complete compliance.

•  Offers expert advice and guidance on how to serve successfully on an investment committee, facilitate effective management, design and implement a robust investment policy and much more 
• Packed with sample documents, forms, templates, checklists, diagrams and other valuable, ready-to-use resources
• Features numerous real-world examples drawn from the author’s years of experience as an accredited investment 

• Language: English
• Publisher: Wiley
• Release date: Dec 28, 2015
• ISBN: 9781118538708

Book preview

Contents

Foreword

Introduction

Chapter 1: Why You Need a 401(k) Investment Committee

Establishing a Benefits Committee

The Role of the Investment Committee

Defining a Prudent Investment Process for 401(k) Plans

Chapter 2: Forming an Investment Committee

Choosing the Right Investment Committee Members

Requirements for Being an Investment Committee Member

Indoctrinating New Investment Committee Members

Chapter 3: Investment Committee Meetings

Control of the Agenda

Information Provided

Disagreements

Documenting Deliberations

Creating and Maintaining Plan Fiduciary Records

Chapter 4: Importance of Investment Policy

Benefits of the IPS

Implementing the IPS

Chapter 5: Complying with Erisa Section 404(c)

Transferring Investment Responsibility

Ensuring ERISA Compliance

Actions the Committee Should Take

Chapter 6: Selecting, Monitoring and Replacing Investment Managers

Committee Responsibility

Selecting the Mutual Fund Manager(s)

Screening

Fund Monitoring Procedures

Review Process

Creating a Watch List Process

Chapter 7: Employer Stock in the 401(k) Plan

Chapter 8: Hiring a Pension Consultant

Additional Questions to Ask a Consultant or Investment Advisor

Co-Fiduciary Services

Chapter 9: Fiduciary Liability Insurance

Related Coverage

Managing Cost

Chapter 10: Understanding Investment Expenses & Fees

Getting Started

Indirect Expenses

Appendices

Appendix 1: Investment Option Evaluation Form

Appendix 2: Investment Committee Meeting Minutes

Appendix 3: Fiduciary Acknowledgment Letter

Appendix 4: By-laws and Operating Procedures for the Investment Committee

Appendix 5: Fiduciary Audit Checklist

Appendix 6: Glossary

Appendix 7: Resources

Copyright © 2006 by Thornburg Investment Management, Inc.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey

Published simultaneously in Canada

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Foreword

Investment risk is a term with which nearly everyone has, at least, some familiarity—an understanding painfully reinforced by the recent dot.com crash and bear market. Fiduciary risk, on the other hand, is a topic most people would struggle to define.

Quite simply, fiduciary risk is defined as the degree of uncertainty associated with a fiduciary’s management of investment decisions.

In the case of a 401(k) plan, the tipping point for fiduciary risk is directly related to the conduct of the plan’s investment committee. If the committee puts together a lousy selection of mutual funds and/or fails to control investment expenses, no amount of participant education is going to make up the shortfalls in the participant balances.

By law, the investment committee must demonstrate that its investment decisions are procedurally prudent—they will be measured against a prudent expert standard. What constitutes a prudent process? Who should be involved? How should the committee be governed? How much reliance should the committee place on outside consultants?

All relevant questions will be answered in this timely text.

The management of an investment committee is no different from the management or supervision of any other business enterprise. It does not require committee members who have extensive experience in securities analysis or portfolio management; it does require selecting members who have an interest in understanding the basics of capital markets.

It requires selection of a team that has a sincere commitment and courage to develop a consensus formulation of goals and objectives with fellow committee members, the discipline to develop long-term investment policies, and the patience to evaluate events calmly in the context of long-term trends. It requires putting together a committee that has the ability to get the right things done—otherwise known as effective management. Prudent procedures, such as the ones outlined in this book, facilitate effective management by distinguishing the important tasks of the investment committee from the unimportant.

All the best,

Donald B. Trone,

Strategic Ethos, CEO (Chief Ethos Officer)

Introduction

For many, the term investment committee conjures images of a group of seasoned financial experts who are highly qualified and skilled in managing an investment portfolio. In reality, most individuals who sit on a 401(k) investment committee are likely to have little or no experience in managing an investment portfolio. In this post-Enron, and ever increasing litigious environment, I feel compelled to write a simple guidebook, Best Practices for Investment Committees, that will provide a clear and concise explanation of how to successfully structure an investment committee.

This book is part of an ongoing series offered by Thornburg Investment Management to provide education and insight to financial advisors and plan sponsors in the area of fiduciary responsibility for qualified retirement plans, specifically 401(k) plans. The first installment in the series, Understanding ERISA—A Compact Guide to the Landmark Act, by Ken Ziesenheim, explains the Employee Retirement Income Security Act (ERISA), including the standards that govern fiduciary conduct of 401(k) plan sponsors and providers. It focuses on the fact that any person(s) who exercises any discretionary authority or control in management or administration of the plan or its assets